Blue Star Limited (500067) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Blue Star Limited's Q3 and 9 months FY '22 Earnings Conference Call. We have with us today from the management, Mr. Neeraj Basur, Group Chief Financial Officer of Blue Star Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Neeraj Basur. Thank you, and over to you, sir.

Thank you. Good morning, ladies and gentlemen. This is Neeraj Basur. I will be providing you an overview of the results of Blue Star Limited for the quarter ended December 2021. But before I get started, I would like to wish all of you a Happy New Year and I hope you and your families are safe and this third wave of COVID did not impact any one significantly. So, on that note, I'll start with the financial highlights first. Across businesses, our focus on expanding distribution reach and efforts to consolidate our market share worked out well. Our product portfolio and service solutions continue to generate encouraging traction across all customer segments. During the quarter [Technical Difficulty].

[Operator Instructions] Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you, Mr. Basur.

Thank you very much. And my apologies for this. The line got disconnected. I will start again. I was going to talk about our financial highlights. Across businesses, our focus on expanding distribution reach and efforts to consolidate our market share worked out well. Our product portfolio and service solutions continue to generate encouraging traction across all customer segments. During the quarter, the pandemic impact remained relatively benign and non-disruptive. Revival of business and economic activity enabled us to end the quarter on a strong note with all the business segments witnessing robust volume growth. The consolidated revenue from operations and revenue from each of the segments for the quarter surpassed revenue achieved by us in the pre-pandemic period. However, increase in commodity prices, cost of raw materials and ocean freight continue to exert pressures on gross margins. Financial highlights for the quarter ended December 31, 2021, on a consolidated basis are being summarized by me now as follows. Revenue from operations for Q3 FY '22 grew 34% to INR 1,506.22 crore as compared to INR 1,123.89 crore in Q3 FY '21. EBITDA, excluding other income and finance income, for Q3 FY '22 was INR 90.59 crore, EBITDA margin, 6% of revenue as compared to INR 81.56 crore, EBITDA margin, 7.3% of revenue for Q3 FY '21. The impact of increase in commodity prices, raw materials and ocean freight and rollback of cuts in discretionary spend that we had undertaken in FY '21, led to lower EBITDA for Q3 FY '22. Profit before tax grew 41.4% to INR 70.32 crore in Q3 FY '22 as compared to INR 49.73 crore in Q3 FY '21. Tax expense for Q3 FY '22 was INR 22.75 crore as compared to INR 12.96 crore in Q3 FY '21. Net profit for Q3 FY '22 grew by 29.4% to INR 47.57 crore as compared to INR 36.77 crore in Q3 FY '21. Carried Forward order book as of December 31, 2021, grew by 4.5% to INR 3,301.33 crore as compared to INR 3,157.90 crore as on December 31, 2020. Capital employed increased to INR 1,105.98 crore as on December 31, 2021, as compared to INR 948.62 crore as on December 31, 2020. Planned advancement in the inventory levels was done to mitigate the increase in the procurement time lines of long lead raw materials and components in order to meet the demand for the upcoming season. Net borrowing as on December 31, 2021, increased marginally to INR 165.11 crores. That was a debt equity ratio of 0.18 as compared to net borrowing of INR 131.01 crore as on December 31, 2020, with a debt equity ratio of 0.16, owing to the increase in inventory and investment in the expansion projects at Sri City and our Wada plant. I will cover the business highlights for Q3 FY '22 now. First, segment 1, Electro-Mechanical Projects and Commercial Air Conditioning Systems. Segment 1 revenue grew 41.7% to INR 829.85 crore in Q3 FY '22 as compared to INR 585.49 crore in Q3 FY '21. Segment result was INR 52.41 crore, which was 6.3% of revenue in Q3 FY '22 as against a profit of INR 34.11 crore, which was 5.8% of revenue in Q3 FY '21. Order inflow for the quarter grew by 34% to INR 852.82 crore as compared to INR 636.54 crore in Q3 FY '21. Our Electro-Mechanical Projects business, driven by CapEx commitments by the private sector, order inflows from the Factories and Light Industrial sectors continue to be encouraging. Inflow of orders from the Infrastructure sector, including NEP projects in water distribution picked up during the quarter. Inquiries and orders from the Commercial Building sector were also encouraging. Carried Forward order book of the Electro-Mechanical Project business was INR 2,311 crore as on December 31, 2021, as compared to INR 2,217 crore as on December 31, 2020, a growth of 4.2%. Commercial Air Conditioning Systems, healthcare, pharma, industrial and government customer segments continued to offer encouraging opportunities, while traditional customer segments such as builder, retail, IT and educational institutions, witnessed increased pace of revival, enabling a growth for the Commercial Air Conditioning business during the quarter. We continue to maintain our #1 position in ducted air conditioning, second position in VRS and moved up to second position in screw chillers during the quarter. Major orders bagged in Q3 FY '22 were from Avenue Supermarkets, DSR Builders, Olympia Cyberspace and JSW Steel. Our international business, stability in the business environment and a general pick up in the economic activities in the Middle East markets enabled growth in revenue during the quarter. With the growth of QSRs in the region, demand for our refrigeration solutions improved during the period. We also witnessed good traction for our products in the newly entered market of Tanzania. The project business in Qatar continued to do well. The operations at the joint venture at Malaysia continue to be impacted due to restrictions on account of COVID. We continue to explore new markets for business opportunities and focus on the expansion of Blue Star product range and building brand awareness and brand visibility in different markets that we are present in overseas. I will now talk about segment 2, Unitary Products. Our segment 2 revenue grew 23.7% to INR 609.68 crore in Q3 FY '22 as compared to INR 492.97 crore in Q3 FY '21. Segment result was INR 38.78 crore, which was 6.4% of revenue in Q3 FY '22 as compared to INR 38.79 crore, which was 7.9% of revenue in Q3 FY '21. Continuous rise in input costs, disruptions in the international supply chain, increased supply lead time coupled with pressures on realization owing to competitive pressures, led to a drop in segment margins for the quarter. Cooling and Purification Products business, despite lower-than-anticipated sales during the festival season, focus on expansion of distribution footprint enabled a 28% growth in revenue from our room air conditioner business during the quarter. We grew faster than the market and ended the quarter with a market share of 13.25% with robust growth in the month of December. We further consolidated our position in e-commerce and modern trade with significant contribution from these channels to the overall revenue. The construction of our new factory at Sri City is progressing as planned and is expected to be commissioned by October '22. Our application for PLI benefits for sheet metal components and heat exchangers has been approved as earlier envisaged. Commercial Refrigeration business, improvement in demand for modular cold rooms from the pharma, healthcare, e-commerce and food and beverages segment, coupled with the revival in the demand for kitchen refrigeration equipment with the opening up of hotels and restaurants, enabled growth in revenue for the Commercial Refrigeration business during the quarter. Additionally, availability of a wide selection of models in varying capacities enabled increased traction for Visi coolers during the period. We continue to maintain our leadership position in deep freezers, storage water coolers and modular cold rooms in this category. I will now talk about segment 3, Professional Electronics and Industrial Systems. Segment 3 revenue grew by 46.8% to INR 66.69 crore in Q3 FY '22 as compared to INR 45.43 crore in Q3 FY '21. Segment result was INR 12.76 crore, which was 19.1% of revenue in Q3 FY '22 as compared with INR 8.26 crore, which was 18.2% of revenue in Q3 FY '21. Revenue for the quarter grew on the back of a few major orders executed in the data security solutions business and growth in revenue from the healthcare business. The testing machine business also continued to witness growth with the revival of investments in the manufacturing sector. Major orders were backed from JSW Steel, ICICI Bank, FIS Payment Solutions and Reliance Industries to name a few. With a wide portfolio of products and solutions forming part of our offerings, the prospects for this business segment continue to be positive. Business outlook. The disruption in the month of January '22 due to the third wave of the pandemic was moderate and we expect the economic activities to once again gain momentum from the last week of February. We anticipate that the peak selling months commencing March will not be impacted. Our mass premium product portfolio in the room air conditioner business continues to resonate well with the distributors and customers. Prospects for the expanded range of commercial refrigeration products are encouraging. We continue to remain optimistic on the growth prospects in the projects business across the select customer segments focused by us. Increased CapEx investments by both the public and private sectors are expected to offer good prospects for the Electro-Mechanical Projects business. While the margins are likely to continue to remain impacted in the short term, we expect revenue growth to be robust. Prudent working capital management will continue to result in healthy cash flows and a strong balance sheet. With that, ladies and gentlemen, I'm done with the opening remarks. I would like to now pass it back to the moderator, who will open the floor to questions. I will try and answer as many questions as I can. To the extent I'm unable to do that, we'll get back to you via e-mail. With that, we are open for questions.

[Operator Instructions] The first question is from the line of Nitin Arora from Axis Mutual Fund.

Just on the dwelling more on the room AC side, you said that Blue Star grew by 28%. Is it possible to help us how much the market grew by, because your opening remarks said that the demand was not that great as per the anticipation? We were listening to Vir as well on TV. He said there's a 25% growth in the quarter for the industry whereas other companies are reporting a decline by the same amount in volumes. So, if you can help us understand what really happened in the quarter with respect to the market and yours? And second, if the demand is so strong and you are increasing market share, why not Blue Star gone ahead took a price hike and get the margins up. So, if you can throw some light on that? That's my first question. Then I'll take up the second one.

So, our understanding of the market growth in this quarter, our understanding has been a little bit of a mixed bag. But overall, we believe or our own checks suggest that it's around 25%. You may find different results for different players. But by and large, the market has done reasonably okay across a few players. And in that context, what we said our growth has been 28%, which has enabled us to consolidate the market share somewhat more. So, while the festival demand wasn't that great as expected, but the month of December and part of month of November, demand has been quite encouraging. That's where, I guess, the quarter has, on an overall basis, performed well. That's what our experience has been. To your question on could we have taken further price hikes. So, you need to bear in mind that probably we were amongst the few players who already took 3 price hikes in 2021. And you'll remember from our last earnings call, the last price increase we took was in the month of September. Now, whether all the players took equal quantum and value of price increases, looks a bit unlikely. So, we needed to calibrate our overall market operating prices as well in order for us not to become an outlier. And then obviously, you are aware there are competitive pressures all the time. So, we didn't consider it appropriate to consider any further price increases because we had already taken price increases. The margin impact that you see, like I mentioned, is on 2 fronts. Of course, there is continued commodity price pressures, which have not abated even in Q3, which pretty much you will probably find from other account as well, other account of other players as well. So, commodity price pressures continue, input cost pressures continue, which is what is kind of eating into the price increase impact considered. The full impact of these price increases once Q4 plays out fully and with this pandemic not impacting, this third wave not impacting as severely as the earlier 2 waves, we are quite hopeful that the competitive pressures in Q4 if they start easing out by February, early March, then hopefully, a part of that should also get translated into the better margin profile starting quarter 4. So, at this stage, we have not considered any further price increase in Q4, either.

My second question is in respect to...

I'm sorry, your voice is breaking, if you can...

Are you able to hear me now? Am I audible?

Yes, you're audible now.

So, the second question was that the products which you launched in the mass segment and there was almost 2x the COVID came and we were trying to test the product in the market, but I think it both impacted both the waves. Now, when at this point you have launched, is it more of primary growth, which has come in the numbers? Can you throw some light how the secondary sales have responded to this particular category which you have launched across the market, that would be helpful?

So, when we talk about growth numbers, we always talk about the growth in value terms and growth in the primary market. That's the consistent reporting that we do. Having said that, our understanding and our experience with the new product portfolio, the mass premium product portfolio in the room AC segment, has been quite encouraging. This is indeed helping us to expand larger -- I'll treat, as far as the target customer segment as well as distribution is concerned, equally well. The entire portfolio is resonating well with the end customers. And of course, the dealers and distributors are happy to sell this new range as well. Now, you're right that we've not had a full one financial year of good runs in the new portfolio ever since we launched this. So, we are hoping that Q4 and then Q1 next year, we should get a good healthy traction and have a full impact of this portfolio as well.

The next question is from the line of Manoj Gori from Equirus Securities.

First of all, congratulations for the good set of numbers in the current environment. Sir, my question is more on the industry outlook. So obviously, when you look at, there is a bit of sluggishness in the consumer demand. However, if you look at last 2 years, industry has lost significant portion of volumes in terms of secondary optics during peak summer period. So, how do you look at the overall demand environment? So, that's my first question, yes.

So Manoj, the overall demand outlook or demand environment in our category and I'm probably talking about room AC here, is actually encouraging. Because see unlike other consumer durable categories, probably room ACs or air conditioning requirements at home with the hybrid working environment, if not completely work from home continuing across now a number of Indian cities. So, you need to bear in mind when this pandemic started, probably this lockdowns were more acutely felt in larger towns and cities. But then over the last 2 years, pretty much all -- most Tier 1 and 2 towns and cities across the country are now following this approach. So, that's indeed something which creates demand for all home or household conveniences of which room air conditioners for sure is one important category that every household wants to focus upon. If for an extended period of time, schools have been working in an offline mode and on an online mode and working-class people have been working from home. Now what has dampened in the last 2 years the full potential of the demand to get converted into actual sales is the disruption in the ability to distribute. Because whenever we've had situations where, let's say, modern trade got impacted or the markets were not permitted to sell and it's happened twice now in the first quarter. Of course, the disruption quantum was lower in FY '21 as compared to FY '20. But that is what makes people a little unsure about stepping out to go out and buy. That is the reason you also see e-commerce taking off quite nicely in this category over the last 2 years as far as the market is concerned. So, our premise is that the demand continues to remain quite, quite robust. It is the environment and the disruptiveness, which has been there in the environment, which probably impacted the full potential to be realized. Now, the only factor that remains is the summer intensity. Now, with the expectation that this year's summer should start setting in as normal somewhere towards beginning of March, we see no reason why Q4 and then again, Q1 of FY '23 should not play out as a normal summer selling season plays out in this category. Of course, we are assuming that there won't be a fourth wave, which hit us in April, looks, hopefully looks unlikely because we've just been through 1 wave in January. And even as there's no new variant, which emerges in the next 5, 6 months, at least that gives us good runway in our category to sell as normal. So, that's what we are considering. And that's what gives us this element of optimism in terms of the quarter 4 prospects as well.

Sir, basically, if you look at, obviously, we are sitting on a favorable base at the industry level. And also, there is a lot of pent-up demand plus the outlook continues to remain robust. So during next year, what is the growth that you estimate for the industry and how Blue Star should pan out given that South markets were relatively weaker as compared to other geographies over the last 2 years? So, how do you see yourself placed for the upcoming summer? And how do you see the industry growing next year? That's my last question, sir.

Correct. So see, if you just go back to pre-pandemic normal growth period which we were experiencing, the growth CAGR used to be in the range of 15% to 18% and in a good year, even going up to 20%. So, we see no reason why in case we are out of these disruptions, market should not get back to 15% to 18% CAGR in FY '23. Our stated position remains consistent because we are already sitting on some 13.2% market share. We would like this to scale up to 15%. And how much of that we achieve in FY '23 will certainly be an area of focus for us. So, our endeavor will be to grow faster than the market in FY '23. And so yes, so that's how we think the market should come back on the normal growth trajectory starting next year.

The next question is from the line of Ravi Swaminathan from Spark Capital.

My first question is in terms of visibility of growth in the project business. So, what kind of growth that we can see in the projects business? So, from where can the large orders come from like metros, rail, data centers, et cetera? You can give me a view, that will be great, sir.

Right. So Ravi, yes, the project business, you are aware that we've adopted a slightly different approach for the last 2 years, where we focused on select customer segments that we keep talking about where the credit profile, the customer's overall credibility and credit profile is rather assured and where the growth prospects are encouraging. So, in other words, we've been focusing a lot more on industrial factories, e-commerce, warehouses, data centers and so on, in addition to the infra sector, which we continue to focus on. Now, with the encouraging you know, all, if you see the enabling factors where whether you say because of PLI-driven commitments that private sector seems to be doing on the factory side. A lot of commitments have already been announced last year, which will now get into fructification. And then in the budget this year, again, there is a good amount of CapEx commitment by the government on the infra sector. So, we believe it should augur well for this segment. And we see no reason why a growth of maybe 12% to 15% should not be possible, at least in FY '23. And then as some of these projects gain more traction, then the growth rates should get sustained for at least the next couple of years. So, we indeed seem to be getting into a new CapEx cycle, which actually started in FY '22. The early signals of that started this year itself, but with more normalization of economic and business environment and with less and less disruption because of pandemic, this should become more visible to all of us. So we, again, are quite optimistic on the growth prospects of segment 1.

And my second question is with respect to margins. There are 2 parts in this. One is your commentary on the steady-state margins in the both the EMP and the Cooling Products segment. In Cooling Products, keeping in mind the mix, there is no mass premium, input cost increase, operating leverage, all if you can comment on that? And also on the unallocable expense. So basically, it has now hovering at INR 20 crores per quarter. And last year, it was on the lower side. So, what is the steady-state unallocable expense that we need to look at over the next 1 to 2 years. So, if you can comment on this, it would be great.

Ravi, let me talk about unallocable expenses first, because after a very long period of time, somebody has asked that question. So last year, you remember, we had -- see unallocable expenses for us actually largely our corporate management team's salaries and the related expenses. Mostly, we are not keeping anything unallocated. Lastly, we had taken fairly incisive salary cuts ranging from 35% to 50%, so -- which have now been rolled back. Our steady state quarterly unallocable is in the range of 20%, 25%, if you see even pre-pandemic, which translates around 1.5% to 1.7% of the overall revenues, which when we benchmark ourselves with our peers, we are in a healthy ballpark range as far as that is concerned. So, that's not an area of concern at all. Now, coming to your question on the segment margins. So, I'll restrict my commentary today to quarter 4 because we are yet to work out our entire pricing and overall operating plan for FY '23. So, we'll cover that probably in May when we meet again. So, quarter 4, like I said, with healthy traction in the overall sales for -- in both the segments continuing as well as the -- there is some easing -- little easing of commodity prices, which we are just experiencing, maybe early days for that. It will not translate into any great benefit in Q4. But with the -- if the competitive pressures on pricing sort of taper off in Q4, because that's the real determinant of effective realization that we can expect, if that starts to happen and once the demand momentum is experienced by most players then of course, the realizations will start looking better. And that should get us to a margin profile of about 7% or so in segment 2 in quarter 4. Segment 1 has been pretty stable, which you would have experienced or seen, it should hover in the range of 5.5% to 6% because, again, the determinant there are -- the size of the jobs that get concluded and closed and so it ranges -- it will range in the same ballpark range of 5.5% to 6% even in quarter 4. And segment 3, again, 18% to 20%, has been a consistent kind of a view and there are quarters where it has been a little lower, but around 18% to 20% in quarter 4. So, that's what our expectation for quarter 4 remains. And yes, that is a good starting point for us to enter FY '23.

The next question is from the line of Sandeep Tulsiyan from JM Financial.

Neeraj, my first question is pertaining to the summer season demand, just harping on that point again. If you look at the normalized number that Blue Star did 2 summers back was close to INR 1,600 crores went down to as low as INR 800 crores in the following summer and came back to INR 1,200 crores last year. Now, if we were to peg this year's summer demand versus that INR 1,600 crore number in terms of what will be the pricing increase you would have taken over that period? And what is the kind of volume growth that you can see for the summer season, keeping that in mind? And how this number would be split between RACs as well as your commercial ref business, if you can give some color on that? That's the first question.

So Sandeep, like I said, our FY '23 plans are still in the making. We very consciously delayed our planning exercise a little bit because we wanted to be clear on how this third wave will play out. There was no point in making a plan in February, March and then -- so we -- so that exercise will now happen slightly later and that's where probably we can give you some more color on what -- how the entire summer season, which starts in March and then rolls over to Q1 next year, plays, will play out in terms of demand, pricing, et cetera. So, we are not ready with an answer yet on that part. I can talk about quarter 4. And like you said, quarter 4 -- see, whatever price increases Blue Star had to introduce and absorb, have already been done over 3 rounds in FY '22, actually started in Q4 last year or calendar -- first quarter of the calendar effect of 2021. So, we have done that. We need to actually now wait for a little bit of calibration of the price absorption by -- across the top few players. And once that starts to happen, then you will see a much better realization profile in order to absorb some of these input cost pressures across the board. That, along with -- if we are optimistic about a good selling opportunities starting February end, March beginning, should definitely get translated into a better margin realization in quarter 4 for us, which I said should be around 7% in segment 2. So, that's what we are looking at. And of course, we will get back to you on FY '23. And also keep in mind, there is a table change that's going to happen from July '22, which will be -- though it is not happening in the first quarter. And that also we'll have to factor in because that does change completely the entire complexion of the blended pricing and that kind of resets a lot of variables in the market as well. So, that's what I guess we'll need to -- we'll be able to give you some more clarity sometime later.

But what will be the cumulative price increase over the last 2 years to compare?

No, sorry, I'll talk about current financial year. So, we are, last calendar year '21, which means, 1 quarter of FY '20 and then this one. Over this period, we have taken around 15% price increase in 3 installments. That's already been considered and taken.

And second, a little bit if you can elaborate on your comment regarding the expansion of distribution reach? So in the previous call, you had highlighted that North as a region has become bigger, of course, because due to neutral demand due to monsoon in South also, but they were contributing equally and totally were about 70% of your sales. So, if you can give some more color and more -- expand your comment on this distribution reach expansion, what do you exactly imply by this? And how has the regional contribution moved in the current quarter?

So, that continues to play well, Sandeep. Firstly, the number of stores that we are now serving is now touching 7,500-plus in quarter 3. This has gone up close to, you can say, some 15%, 20% over comparable period last year. And the productivity, the activity levels in these stores is looking quite healthy. This number we expect to touch to 8,000 by the time we exit this current financial year. So, there's a lot of work happening on that. That's what when I said expansion of distribution I meant that. Within this, of course, like we mentioned last quarter, North continues to track well and is now measuring up quite nicely as far as the overall share of business is concerned. So overall, we are having a situation where North and South are almost at an equitable level in terms of our overall contribution to sales followed a notch level below by West. So, North has indeed caught up for us in the last, I would say, couple of years now.

The next question is from the line of Anupam Gupta from IIFL Capital.

So, first question is on the margin trajectory for the products business, where you said that pricing action by competitors will be a big determinant. So as per you, what is the current let's say inventory levels which other people are -- other companies are carrying? Or what is driving that sort of higher price [ for the machine ]? And how do you see it moving over the fourth quarter?

Sorry, Anupam, is your question on the inventory level? I didn't hear that clearly.

So, what I was asking is what sort of inventory levels do you see in the channel both for you as well as for competitors and what is -- which is driving the higher competitive pressure which you see? And how do you see it changing over the quarter?

So, the good news is that, again, our impression or our checks suggest that by the end of December, inventory levels across the top few players are pretty normalized. And also with the channels is pretty normal in the context of a normal Q4. So, that's a good news. Our inventory levels, you'll remember, you'll recall, started to normalize in Q2 itself and we were pretty comfortable with our closing inventory levels end of September. The reason you will see slightly higher capital employed in segment 2, because we have consciously built up raw material and component inventory in order to counter or mitigate the impact of the lead times, which are -- we are still unstable as far as international supply chain is concerned. We didn't want to run the risk of any production disruption in Q4 or Q1, but that's a conscious choice. So, that's something which will get normalized by Q1 next year. We're not worried there. So overall, finished goods inventory, our checks suggest that it is beginning to look good. And end of December, it was not out of range for it to cause a pricing pressure for at least few players. So yes, that remains to be seen now how the pricing plays out in Q4 with that background.

And so just to continue there, would it be right to assume that given that everyone has this romped in pricing pressures and now the inventory are normal as per you, the price hike should be pretty quick, or will that -- will a weak demand...

No. So, the price hikes that get announced or that get rolled out, actually for them to get transmitted is where all these variables play out because, obviously, there are all these pressures on account of inventory levels and some players wanting to be more price aggressive start to make an impact. But in a quarter or quarters where the demand starts to grow rapidly because, let's say, summer season is pushing that an element of pent-up demand, then most players will tend to normalize the pricing transmission quite rapidly. So, the answer to your question is even without necessarily taking any further price increase at least in the next 3 months, there is no reason why the realization, effective realization should not be some normalization in Q4 with a good traction on the demand side.

And just one question, if I may, on the project side. So you have over the last 2 quarters, given a very healthy margin in the project business. And going by your commentary that both pace of execution as well as order finalizations are very healthy, should we not see these margins continue and why is your guidance stayed lower than 6% there? If execution is strong and if order inflows are strong, ideally, you should be able to give a slightly better margin trajectory there going ahead?

We wish that was the case. But the fact is that this is a very slightly costed category. And it's, see again, in this category, we need to be -- we need to follow a balanced approach between what kind of business, which -- what kind of orders we accept and what price is, how do we manage the contracting side of it and how do we manage the exposures, which also include possible potential delays and also the customer's ability to honor their obligations apart from our obligations. And of course, the cash flows. So, when you triangulate these 3, it's not -- it's never going to be easy to have a situation where the margins keep increasing over a steady period of time. So, the reason you see steadiness in our margin profile. So, that's a trade-off. Either we can go aggressive on 1 of these 3 variables or 2 of these 3 variables, and then probably in the short run, you may see a different profile. But if one needs to consider steadiness and consistency, then our experience tells us that this approach of a balance between these 3 variables will be healthy, and with steady, healthy and good healthy ROCs as well. Because when you see the ROC profile of this segment, it looks quite encouraging apart from the EBIT profile. So overall, we feel that this consistent performance of 5.5% to 6% should continue. You will see quarters where it will be more than 6% also. But that will be sort of contingent upon certain large projects or projects with slightly healthier margins getting closed out and so on. So, to be -- you can say it's a bit conservative view, but we feel it's a more realistic view of where this segment can go. So, with healthy growth rates and a steady margin of say 6% and an equally encouraging ROC profile, we are happy growing this entire category as we have been doing in the past.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

Congratulations for good numbers. So Neeraj, if you could help us with an update on our expansion projects? What is the kind of time line and the capacities that we are looking at?

So Bhavin, there are 2 projects I'll talk about. Firstly, very shortly, I guess, in the next 3 months, we will go live, we'll commission our second deep freezer manufacturing plant in Wada. Now, this CapEx was underway for the last 1.5 years, in between, we had a little bit slow down because of the pandemic, but now it's been brought back on track, and we expect this to go live very soon. This will help us. So, the objective of setting this plant up in Wada was to substitute import of a few SKUs, which so far we've been importing. So, this is kind of going to help us indigenize and for this segment, reduce import dependence quite a bit. So, that's what will help us. And of course, once we indigenize it will have its own robust effect on the other downstream elements as well. The second project that's underway under commissioning -- under construction is in Sri City, which should get commissioned by Q3 of this financial year, in the quarter, October to December. This will be to begin with, we are going to set up the third room air conditioner manufacturing facility there in Sri City, along with -- in this plant is where we have applied and got the PLI benefit as well. Capacities are going to be phased out. So, it's not that we are going to start -- so this rollout will happen in phases and we will keep augmenting the capacity of this plant to align and calibrate with the capacities we are having in our Himachal plant, the 2 Himachal plants, so that all the 3 plants put together, again, help us significantly increase the own manufactured base. So again, you'll remember that till 2 years ago, there used to be certain imports, which got reduced because of changes in the BCD structure over the last 2 years. And then, of course, we've been also buying from certain outsourced contract manufacturers. So, the intent here is while we'll continue with that arrangement for select SKUs to buy locally, but the idea is to increase or it's a mix change, fulfillment mix change from a combination of imports and ODM manufactured to our own manufactured. So traditionally, we maintain a 50% to 60% own manufactured proportion. After Sri City goes live, a combination of these 3 plants should take us to around 70% or even 75% over a period of next couple of years. So, that's what is the plan, and we think we are well on our way to execute that plan as envisaged.

Just a follow-up on the -- of freezers, what is the total CapEx incurred for? And what is the volumetric expansion on the capacity that will be from the current levels?

So the overall, CapEx we spent in this plant over the last 2 years is around INR 100 crores, which is more or less completed. So, no further CapEx in this deep freezer plant is expected in FY '23. Whatever needed to happen will conclude by FY '22. In volumetric terms, I may not be able to give you an answer right away. But like I said, overall, the growth for this is deep, this refrigeration, commercial refrigeration products is a subset of our segment 2, and this contributes equally well as far as the overall segment growth is concerned. So obviously, if our aspiration, let's say, next year is to take the growth to be higher than the market in whichever proportion, then that growth will percolate to commercial refrigeration as well. So, that -- it is more at this point in time of import substitution. And then, of course, those capacities will help us scale up faster once this plant is fully operationalized by FY '23.

And just a housekeeping question. On the Unitary Product segment, if you could just help us with the mix with RAC and non-RAC for the current 9 months and the previous 9 months?

So, it's almost similar around 60% is RAC and 40% will be the basket of other non-RAC products. And it's remained pretty at that level because obviously, RAC growth has been a bit subdued over the last 2 years. It can go up to 65% for RACs when the growth rate, so you can take a 65%, 35% or 60%, 40% in that order.

The next question is from the line of Nirav Vasa from Anand Rathi.

So, sir, just this is pertaining to the price hikes that we need. What I'm able to understand is that price hike is going to be a function of volume off-take. So, just wanted to understand if the season goes well, what is the kind of price hikes that can happen across Q4 and 1Q to pass on the costs?

So Nirav, I mentioned about this part a short while ago. So, as far as Blue Star is concerned, we are not expecting to take any further price hike in Q4. So Q1, like I mentioned, we are not yet clear on the plan, which we'll have clarity by March because we need to factor not just the summer season off-take, but also the impact of the table changes, which will happen from July onwards. So, that question we will pause for now. Q4, we are not anticipating any further price increases from our perspective. But we definitely expect the other players to catch up on the price increases, who were not able to take sufficient price increases in the last 3 quarters. At some stage, once the demand shows up for everyone, it will be a good opportunity for the entire market to become calibrated on the level of pricing. And that, like I mentioned, probably will have a favorable impact on the -- at least the mitigation effect on the price commodity prices, which are impacting everyone.

So sir, the second question pertains to the ad spends that we will be looking for the peak summer season. Is the number for that finalized?

No, not yet, not yet. So, we -- it's a bit too early, and we need to -- like I said, we haven't made our plans yet for FY '23. And we will be -- but like you've seen us in the past, we usually calibrate that fairly quickly with the ongoing market conditions and market opportunity as well. But that clarity will get again in the month of March or April.

The next question is from the line of Sujit Jain from ASK Investment Managers.

Sir, just wanted to check with you, since you said your price hike probably was not matched by some of the other players. So, that mean that your value growth is definitely higher? But volume growth could be similar to what industry would have been -- would have done in Q3?

Possible, because see, it's not too much of a difference. Our own sensors industry has grown by around 25% and we are saying 28% for us, so there's maybe 500 basis points higher. And part of that, you're right, will be the impact of price increases also.

I check your commentary for Q3 last year as well where you talk about 13% market share and 13.2% market share Q3 FY '22 as well. So probably, in terms of volume and if you can also tell about 9-month volume for the industry and for you in terms of growth rate?

So, Sujit, we always talk about the growth and market share in value terms and reclarifying that because volumes are a bit inconsistent to track and explain. So, we have always found value and that's for primary market, so I'm reclarifying that part. So yes, our market share optically if you see is 13%, 13.25% over the last 1 year. We have been conscious not to go -- I mean, just for the purpose of market share expansion to have a further margin implication because see that's the trade-off. If one wants to be aggressive on the market share and there is a margin trade-off impact as well. And since this entire pandemic has played -- has been playing on, so we have tried to be realistic as well as reasonably aggressive on holding on to the market levels such that once the market normalizes and of course, that gives us much better clarity on the overall strategy that we can have on the -- on further augmenting this market share. So, it is again partly by design and choice that we are just holding on to the market share as these levels are on-off.

You can just share the 9 months value growth for you versus the industry like you shared for Q3?

I will just tell you. I will just tell you this number. In the meantime, we can move on to the next question, I will --.

One last question. Capital employed, the entire increase is because of the higher inventory you've chosen, right? No CapEx has come into the gross loss so far?

No, definitely. So, it's a combination of both these things. So, short while ago I was talking about CapEx that we have mostly finished in our Wada plant for deep freezers. That also sits under segment 2. So, it's a combination of inventory for the room ACs and the capital expenditures that recently happened, recently as in last 1 year for the deep freezer expansion. It's a combination of both.

Wada would have added INR 130 crores, right?

Wada would have added about INR 100 crores. So, then there's normal routine CapEx also in the plants where we are -- we have the routine regular CapEx. So, just to answer your question, Sujit, on the year-to-date 9 months market versus us, we have grown by around 36% for the first 9 months and market growth rate, our checks suggest is around 33% to 34%.

We'll take the next question, a follow-up, from the line of Sandeep Tulsiyan from JM Financial.

I had a couple of follow-up questions. One was on the e-commerce share of sales, which you had mentioned that Blue Star was tracking a bit lower than the industry, about 13% to 14% of your sales through e-commerce. So, if you can just give an update and what is the outlook going forward on that side? What is the current share of sales from e-commerce?

So, for quarter 3, it is -- overall market was around 10%, and we were around 8% for quarter 3. Of course, quarter 2, it was higher. The overall share was higher for market and as well as for us. On a year-to-date basis, the market is tracking at around roughly around 18% of their overall share of e-commerce sales and we'll be around 14% to 15% now.

On an annual basis, it will be 14% to 15%, right?

You can assume because I talked about 9 months. So, I don't expect -- we don't expect this to significantly change in quarter 4, the proportion.

And second question was regarding these tax breaks that is given under Section 115 D that is at 15% for new manufacturing unit that commence production in March '24 now. So, for the new investment that we'll be doing under PLI, will that unit have this lower tax rate?

Correct. It will have and of course, this extension of 1 year has happened only yesterday, day before yesterday. But we are on track, so like I said, go live with the commercial production in FY '23 itself, much before March '23, which was the original drop-dead date for that.

So, how should we look at your tax rates going forward because we're still tracking higher tax rate in the current quarter or significantly higher at 33%.

So, that's a normal tax rate because, see, till last year, we had certain ATIC benefits in our Himachal plants and which have since expired, that was 10-year holiday that got expired. And then last year, obviously, the profitability was lower till Q3, and you will see a full annualized tax rate of around 31% last year as well because Q4 was a profitability quarter. And we are at 32%, 33% right now. So, that's pretty normal. That's a normal tax level that you can expect from an expected tax rate is concerned. We will be sharing -- again, like I said, once we are done with our budgets for -- plan for the next year, a blended tax position for FY '23, probably we'll share with you by May, but this should reduce because a combination of even from a Blue Star perspective, we will shift to the 25% tax regime from FY '23. The full impact of this lower tax rate 1 month IBA will not be available in FY '23 for the new plant because it will be FY '24 when they will be fully operational. So, we'll give you some idea probably in May.

As there are no further questions, I now hand the conference over to Mr. Neeraj Basur for closing comments. Over to you, sir.

Thank you very much, ladies and gentlemen. With this, we conclude this quarter's earnings call. Do feel free to revert to us in case any of your questions were not fully addressed and we will be happy to provide you additional details by e-mail or in person. So, with that, wish you all the best and stay safe. Bye-bye.

Thank you. Ladies and gentlemen, on behalf of Blue Star Limited, that concludes this conference. We thank you all for joining us and you may now disconnect your lines.